Trend Following
Trend following is buying assets that are rising and selling those that are falling, staying in until the trend shows signs of ending.
Trend followers do not try to predict where prices will go.1 They wait for a trend to show itself, join it, and stay in until it ends — accepting many small losses in sideways markets in exchange for a few large wins when a big trend comes along. It is one of the oldest systematic approaches in trading, and one of the hardest to stick with emotionally. This entry explains the rules, the arithmetic of low win rates and big winners, and the psychology it demands.
- Category
- Trading Strategies
- Reading time
- 5 min
- Also called
- Trend trading, Trend follower, Trend-following strategy
- Updated
Trend following in plain words
Buy what is going up, sell (or short) what is going down, and hold until the move stops. The entry might be a breakout to a new high or a moving-average crossover; the exit is a trailing stop or the opposite signal.
Most trades are small losers — the trend never develops. A few trades catch big moves and pay for all of them. See Expectancy.
How a trend-following system works, step by step
Define the trend signal
For example price above a rising long moving average, a fast average crossing above a slow one, or a breakout to a multi-week high.2 See Moving Average and Breakout.
Enter in the trend’s direction
Long in uptrends, short (or out) in downtrends. See Trend.
Set an initial stop
Often a multiple of the average true range below entry. See Average True Range.
Size from volatility
Volatile markets get smaller positions so each trade risks the same amount. See Position Sizing.
Let winners run
Exit with a trailing stop or an opposite signal, never at a fixed small target. See Trailing Stop.
Diversify across markets
Trends appear in different markets at different times; trading several raises the chance of catching one.
Worked examples
Example 1 — The shape of results
Big winnersOver 40 trades a trend follower has 14 winners averaging +3.5R and 26 losers averaging −1R.
| Win rate | 35% |
| Expectancy | 0.35 × 3.5 − 0.65 × 1 = +0.575R |
| Over 40 trades | ≈ +23R |
Two losses in three, yet strongly profitable — because a few big trends pay for everything else.
Example 2 — A crossover trade
TrendA stock’s 50-day average crosses above its 200-day at $80. The trader buys, trails a stop 3 ATR below the high, and is stopped out months later at $112 after a peak of $121.
| Gain | $112 − $80 = +$32 a share |
| Given back from the peak | $9 |
Trend followers deliberately give back part of every big move — the price of not guessing the top.
Example 3 — The whipsaw period
WhipsawIn a sideways year, the same rules produce 9 trades: 1 small winner of +0.5R and 8 losers of −1R.
| Result | +0.5R − 8R = −7.5R |
| At 1% risk | ≈ −7.3% drawdown |
Long flat periods are normal for trend following. Systems fail most often because traders abandon them just before the next big trend.
A classic trend signal: moving-average crossovers
Trend following vs. mean reversion
| Aspect | Trend following | Mean reversion |
|---|---|---|
| Idea | Moves continue | Stretched prices snap back |
| Typical win rate | Low (often 30–45%) | Higher (often 55–70%) |
| Typical win size | Large | Small to moderate |
| Best markets | Trending | Ranging |
| Hardest part | Long losing streaks | Rare large losses |
Where trend following is used
Futures and commodities
Many systematic funds apply trend rules across dozens of futures markets. See Futures Contract.
Stocks and ETFs
Long-only trend filters, such as holding only above the 200-day average.
Crypto
Large, persistent trends make trend rules popular, with high volatility to manage.
Portfolio risk control
Trend filters can reduce exposure during long declines. See Bear Market.
Advantages and disadvantages
Advantages
- Can capture the largest moves in a market.
- Rule-based and easy to automate and test.
- Losses are kept small; profits are allowed to run.
Disadvantages
- Low win rate and long losing streaks.
- Signals lag, so part of every move is missed.
- Whipsaws in sideways markets.
- Psychologically hard to follow through flat periods.
Going deeper
Read as far as you need. Each level builds on the one before it.
The trend is your friend — until it bends
Beginner
A trend-following trade is not wrong when it loses; it is wrong when you break the rules. Most individual trades will lose.
Volatility-based sizing
Intermediate
Classic trend systems, such as the rules taught to the Turtle traders, size each position by volatility so that a normal move in any market changes the account by about the same amount. See Turtle Trading System and Volatility.
Why trends may exist at all
Advanced
Proposed explanations include investors reacting slowly to new information, herding, and hedgers and central banks acting over long periods. None guarantees that trends will continue to appear with the same strength, which is why systematic traders diversify across many markets.
Common mistakes
Taking quick profits
Cutting winners early removes the large wins the method depends on.
Abandoning the system after a streak
Flat or losing periods are part of the design.
Over-optimising signals
Fine-tuning averages to past data rarely helps live. See Overfitting.
Trading one market only
One market may not trend for years; diversification raises the odds.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Trend following joins established trends and stays in until they end.
- Low win rates are normal; large winners pay for many small losses.
- Signals lag by design; part of each move is always missed.
- Volatility-based sizing and diversification are core to the method.
- The main challenge is sticking with it through flat periods.
Frequently asked questions
Does trend following still work?
What is the simplest trend-following rule?
Why is the win rate so low?
Further learning
- Trend
What trend followers are trying to catch.
- Moving Average
The most common trend signal.
- Mean Reversion
The opposite approach.
- Expectancy
Why a 35% win rate can be profitable.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Fidelity. Basic concepts of trend (opens in a new tab) Checked .
- Fidelity. Simple Moving Average (SMA) (opens in a new tab) Checked .
Read more elsewhere
- Trading Metrics (our sister site): Trend Indicators (opens in a new tab)
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. Trading Metrics is our sister site, under the same ownership; we are not affiliated with any other publisher linked above. Last reviewed . Report an error or request a source credit.